Personal finance online

By Felix Salmon

March 14, 2010

Banking 2.0 panel at SXSW yesterday; is it normal that most interesting discussion at these events tends to take place in the Twitter backchannel? Still, two interesting questions did arise, around the cool'n'webby financial services companies like Smarty Pig and Mint and Credit Karma which were on the panel: are they basically engaging in regulatory arbitrage, and are they also helping to entrench the too-big-to-fail banks in their existing market positions?
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I attended a predictably utopian Banking 2.0 panel at SXSW yesterday; is it normal that most interesting discussion at these events tends to take place in the Twitter backchannel? Still, two interesting questions did arise, around the cool’n'webby financial services companies like Smarty Pig and Mint and Credit Karma which were on the panel: are they basically engaging in regulatory arbitrage, and are they also helping to entrench the too-big-to-fail banks in their existing market positions?

The moderator of the panel, a relentlessly upbeat woman named Jennifer Openshaw, was particularly impressed that the webby panelists had more Facebook fans than the biggest TBTF banks. But the audience wasn’t. Any bank on that list probably has more compliance officers than the total number of employees of all of the companies on the panel combined, and when it comes to things like embracing social media, the job of compliance officers is basically to say no, or to try to mandate things like adding the words “Member, FDIC” to the end of every tweet.

The web-based financial-services firms, then, are rushing into the vacuum left by the biggest banks, which generally confine their messaging to spaces like their own websites, or their own mailings — things where they can remain in control of as much as possible. Certainly the banks still have a lot of room for improvement when it comes to things like personalization, but to degree that might surprise you, their absence from the open web is necessitated by the regulatory constraints within which they work.

One question, from John Davis, touched on this directly: insofar as the financial crisis was caused by largely or entirely unregulated institutions, shouldn’t we be naturally suspicious of financial-services companies operating outside any kind of regulatory oversight? It’s true that these companies aren’t banks, or depositary institutions, but the same could be said for many an unregulated mortgage lender of old. And even when they never touch money themselves, they’re still responsible for major financial decisions being made my millions of Americans. So far they’re mostly on the side of the angels — although not entirely, as we’ll see — but the “trust us, we’re on your side” schtick is never particularly compelling, and I for one would love to see them voluntarily register with any new Consumer Financial Protection Agency to get its stamp of approval.

One hint of a business that many of these customers might object to came later in the afternoon, at the Data is Money panel, where Mint’s Aaron Patzer, after saying what was by far the stupidest thing I’ve heard at SXSW so far, then started talking about the rich value of all the store-level data he was sitting on. For instance, he said, he can see pretty much in real time how much money his huge database of customers is, in aggregate, spending at Blockbuster vs Netflix vs Redbox, or any other set of retailers — and that kind of information would surely be extremely valuable to hedge funds. It was clearly something he’s talked a lot about, and he never said that he wasn’t already selling that data to the highest bidder. If that kind of activity is going on, especially if Mint is using data retrieved using the username and password to my own personal bank accounts, then I would certainly want some kind of regulatory oversight.

Another potential problem for these companies is that they’re aligning themselves very much with the biggest of the TBTF banks, which have retail footprints spanning the nation and which also have enormous online marketing and customer-acquisition budgets. In a country with a lot of anger against those banks, and which is largely sympathetic to the Move Your Money campaign, the web-based companies facilitating the online operations of America’s biggest banks don’t look particularly harmless.

When asked about this, the web companies tend to talk a lot about simply doing what their customers want, and providing their customers with impartial information, and working just as happily with community banks as they do with BofA. But I, for one, am not convinced. Community banks aren’t set up to work with websites like these, and credit unions, with their restricted fields of membership, certainly aren’t — so far there isn’t even a good online tool enabling consumers to work out exactly which credit unions they’re eligible to join.

I see personal-finance websites, then, as playing straight into the hands of banks whose business model is predicated on dominating the market, even if on the face of things those websites allow all financial institutions to compete on a level playing field. That’s one reason I’m more well disposed towards peer-to-peer lender Lending Club, which right now is only offering 3-year unsecured loans, but which will surely, in future, move into other areas such as auto loans and small business lending. If small businesses can get a loan more easily from Lending Club than they can from their local Wells Fargo, and if Lending Club can somehow compete with Wells Fargo in terms of how it’s featured on sites like Mint.com, then maybe the internet can help a little bit in the move away from TBTF banks. But I still worry that overall, the trend online will be in the opposite direction.